But we know from experience that this is not what actually happens – people often buy products that are obviously not the cheapest or even the best value. A number of marketers, psychologists, and economists have looked at this phenomenon and tried to explain it. One of the most convincing explanations comes from international marketing guru Philip Kotler and his perceived added value.
Kotler’s view is that things that are conventionally called products or services should more properly be called offerings. An offering consists of two parts:
In this download we explore the implications of Kotler’s thinking – both for charities and public bodies seeking to convince donors, service users, or beneficiaries to choose their offerings over others.
Let’s explore the basis of the original thinking. The implication of the customer or consumer acting in their own best interest is that the first supplier of any new item will have a monopoly for a while and be able to charge what they want. (Think iPad.) But over time other companies will get in on the act and start selling almost identical goods. When that happens suppliers will then have to compete with each other on price… and the customer/consumer will choose the cheapest on offer.
Clearly this broad principle holds true for some things we buy. We see petrol as the same whether we buy it from Shell, Esso or Tesco. And given a choice we’ll buy whatever is cheapest. The same is true for electricity. Electricity keeps our lights on whether we buy it from British Gas or Eon. And most of us don’t particularly care who sells it to us, as long as it works. When this is the case we can describe these as commodity industries or commodity products.
This has some important implications for charities in the same business – how do we tell the difference between international child development agencies who use the sponsorship mechanic, such as ActionAid, Save, Plan, and World Vision? Should we just go for the ‘cheapest’ way of supporting children?
The reality is, we don’t just buy things because they are cheap, nor do we support particular causes because they offer ‘best value’ to deliver a vaccine, or build a well, or answer a call to a child protection line. We are willing to pay more for something because of both the core product or service and its perceived added value.
You can imagine this combination as an egg.
The yolk is the core. This is what the product or service does – its performance characteristics. So it’s a cup of coffee, or a pair of trainers, or a pensions pot. In a charity/public sector setting it’s an adoptions agency, or a contemporary art gallery, or a child protection helpline. It does what it does.
The white is the perceived added value. This can be a number of things: if it’s a box of chocolates you buy as a gift, then it can be the fact it’s from Belgium or Switzerland. If it’s a pair of trainers, it can be the fact they are Nike. And if it’s a hospital it could be that it’s publicly owned or, interestingly, that it’s privately owned.
Kotler suggests it’s the perceived added value that encourages us to act ‘irrationally’ and counter to the economic imperative and pay more or change suppliers.
So we will pay more to:
We’ll pay a lot more for what we believe an item says about us – hence the power of branding and logos. This means we’ll spend four times as much on Nike trainers than on Tesco trainers. Even though they could have made by the same factory, using the same materials, to a similar design. We’re not Olympic athletes whose trainers are hi tec tools of the trade. We wear our trainers out to see friends. And either Nike or Tesco trainers would get us there and back safely. But the branded trainers have more perceived added value and some of us are happy to pay significantly extra for the Nike tick.
From small beginnings in 1976 the Body Shop experienced rapid and global growth. Like many other companies it sold moisturiser as a core product. The moisturiser itself (the product) was as good, or bad, as any on the market. And Body Shop made no ‘miracle’ claims that their moisturiser would either prevent all wrinkles or make you look 18 again. But people chose to pay more for their moisturiser because of its perceived added value. That value was that they were the first company to offer ethically sourced toiletries and cosmetics not tested on animals. Their approach directly addressed the values and concerns of their customers. And so people were happy to pay more for their goods.
Twenty-five years later however, that unique perceived added value had significantly diminished. Almost all retailers avoided products tested on animals. And now in 2015 it is hard to go into a chemist or supermarket and find a toiletry that has been tested on animals. The values and ethics that drove the Body Shop have become so shared and commonplace that ‘no-animal testing’ is part of the consumer expectation – indeed it’s become part of the core product and not the added value. In one sense this is a success on Body Shop’s part you might argue, but the resulting lack of uniqueness has had an impact on their profits and success. (And they now espouse a wide range of other social values to try and reclaim a different PAV.)
So while we may believe that something has perceived added value, above and beyond what it actually does, that value can increase or decrease over time.
What differentiates your organisation, what is your added value? What is it that makes you different to your competitors? Why should funders, partners, beneficiaries, or supporters choose you over someone else?
You might have lots of things that you think make you distinctive: your history, the fact you are local, national or international, your low overheads, your volunteer base, or your excellent monitoring and evaluation processes. While any of these may be true, the only important thing is the perception of your audience – what do they really care about, and how can you show how your work meets their needs and interests?
Your supporters might not care about your history, your geographical spread or your impact measurements. They might just want to know that you will ensure their money is used to help people in real hardship. They could support any charity, but they will stay with you if you match that need.
To make use of Kotler’s thinking we have to apply the ‘offering’ framework to both ourselves and our work.
Think about your organisation and the things it does. What is your core offering? It could be a chance to rid the world of poverty, or to provide social housing, or to help people with debt advice, or to promote sexual health.
Now think about your perceived added value in the minds of your customer, supporters, donors or service users. (It may be important to you… but is your offering important to them?)
Use this as a checklist:
Think too about your main competitors. What’s their added value? How can you distinguish your agency from them?
Charities also sell goods. Oxfam run highly successful charity/thrift shops that mix both the high end and the low cost products. Some of these are donation/second hand and some are new but fairly traded. At the back of the shop are the racks of £2 second-hand jackets. The core product is the jacket. For the low income customer looking for a cheap jacket, there is not much perceived added value in shopping at Oxfam. At the front of the shop, are the ethically sourced products. If you have reasonable income and want to buy a friend a present in the same shop you can buy them a fair trade magazine holder, made by women in developing countries earning a fair wage, made out of environmentally sound materials. Functionally it’s just a magazine holder, but it can have, to the right consumer, huge perceived added value. Supporting its producers might make you and your friend feel good. So you’ll pay £20 for it. Both the jacket and the magazine holder are great offerings to have in the store. But they have differing amounts of added value – and that dictates the price Oxfam can charge, and what customers will pay.
If you’ve found this article helpful and you’d like support to increase your perceived added value or with strategic development generally, please contact Bernard Ross, Director or call +44 7976 280 314.
You can also read Bernard’s book on strategy, The Strategy Workout, published by Pearson/Financial Times and co-written with Clare Segal.